By David Lawder
ASHEVILLE, North Carolina, Sept 2 (Reuters) – Ballooning debt and rising bond yields in advanced economies are threatening to undo developing and low-income countries’ progress in reining in their own debts, International Monetary Fund Managing Director Kristalina Georgieva told Reuters.
Georgieva said in an interview late on Tuesday on the sidelines of a G20 finance leaders meeting in North Carolina that bond yields are being driven upwards by higher overall debt levels, continued inflation pressures from the still-closed Strait of Hormuz, and competition for capital from AI-related debt issuance.
“This is not just a low-income developing countries problem,” Georgieva said. “High debt levels in advanced economies, combined with stubborn inflation, could lead to debt service costs going up for everybody, including for the low income, for the emerging markets and developing economies.”
U.S. government bonds have sold off in recent weeks, pushing the 30-year U.S. Treasury yield to near two-decade highs.
In 2022, the IMF estimated that 60% of low-income countries were in debt distress or at high risk of distress, but Georgieva said this had since eased because of strong fiscal policy reforms with support from international institutions and official creditors.
That progress is now at risk, she added.
“We need to remember that some of the emerging market economies have worked very hard to gain market credibility and compress spreads. That could be erased by a lift in debt service costs, by the increase in yields globally by advanced economies,” Georgieva said.
Nonetheless, she said that debt markets were functioning in an orderly manner and expressed optimism that there was broad consensus among G20 finance ministers and central bank governors on improving the G20 Common Framework for debt restructuring and speeding up relief for countries experiencing debt distress.
SENEGAL TEST CASE ON DEBT
During a G20 session on sovereign debt restructuring, the IMF announced it had reached a staff-level agreement with Senegal for a $2.2 billion three-year loan package, conditional on Senegal’s seeking Common Framework debt treatment.
The Common Framework was launched during the COVID-19 pandemic in November 2020 to bring official and private creditors together to agree on restructuring crisis-hit countries’ debt. But it took years to achieve debt workouts for the first two debtor countries, Chad and Zambia, amid disagreements over how any losses would be shared among private creditors, international institutions including the IMF and World Bank, and their largest lender, China.
An improved process agreed to in May aims to streamline debt restructurings by laying out required steps and linking them with an IMF financial support agreement, which also requires a memorandum of understanding with the creditors committee on the main terms.
Georgieva said if the new process works well and quickly for a Senegal debt workout, it will encourage more countries to seek similar debt treatments.
“We have the next case,” she said of Senegal. “Let’s make it work, and you can be sure that the Fund would be very relentlessly pursuing speedy completion.”
(Reporting by David Lawder; Editing by Edmund Klamann)
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